A startup with deep metro Detroit roots went public Thursday in one of the biggest initial public offerings of the year.
SmileDirectClub Inc., a Nashville-based at-home teeth aligner startup, will raise more than $1.3 billion from the IPO, which set a $23-per-share price Wednesday evening, according to Bloomberg News. That made it the sixth-biggest IPO of the year.
However, the stock opened with a thud. Shares tumbled nearly 29 percent to close at $16.44 in their Nasdaq debut after the company’s IPO was priced above its initial target range of $19-$22. That made it the first U.S. company since at least 2008 to raise more than $1 billion and price its IPO above range, yet sink in its opening trades, Bloomberg reported.
SmileDirectClub launched in 2014 with financial backer Camelot Venture Group, a Farmington Hills-based investment firm founded and co-owned by David Katzman, father of one of the SmileDirectClub founders and a former Dan Gilbert business partner. Katzman is also CEO of SmileDirectClub.
Co-founders Alex Fenkell and Jordan Katzman, both 30, are childhood friends who met at a northern Michigan summer camp when they were teens.Fenkell is from Bloomfield Hills and attended Cranbrook, while Katzman of Franklin attended Birmingham Groves High School. They partnered with Jordan's father, David, and his Camelot firm that has invested in Quicken Loans Inc. and 1-800 CONTACTS, among others.
SmileDirectClub sold 58.5 million shares of Class A common stock, according to a Securities and Exchange Commission filing.
The company, which dubs itself as disrupting the orthodontics industry, started trading Thursday. It is listed on the NASDAQ Global Select Market in New York under the symbol SDC.
Katzman, Fenkell and Jordan Katzman rang the NASDAQ opening bell Thursday morning and NBA star Draymond Green, an investor, was scheduled to participate in promotional activities in New York City. SmileDirectClub flooded Times Square with advertisements to celebrate the IPO.
The company was valued at $3.2 billion as part of a funding round last fall. The IPO price values it as a public company at around $8.9 billion, Crunchbase.com reported. David Katzman will retain control of the company after the IPO through a separate class of stock with special voting powers, according to federal filings.
"We're still a young company, but our IPO is a key milestone to help us continue to grow and keep our rocket ship soaring," Fenkell said in an emailed statement.
Though SmileDirectClub moved its headquarters to Nashville in 2016, Katzman remains in metro Detroit while Fenkell spends most of his time at the company headquarters with frequent visits back home.
Why Nashville? Fenkell notes the city is a hub for the health care industry and calls the vibrant and growing city an attraction for talent.
"Known as the health care capital of the southeast, we felt the synergies between Nashville's rich history and our innovative business model worked well," he said in a statement.
David Katzman is a former Quicken Loans vice chairman and Gilbert's cousin. Gilbert, the billionaire, Quicken Loans founder and Detroit real estate mogul, is a former partner in Camelot with Katzman — they invested together in graphics company Fathead LLC, among others.
Katzman was also part of Gilbert's investment group that bought the Cleveland Cavaliers for $375 million in 2005. Katzman reportedly had a falling out with Gilbert and sold his stake in the team, Crain's reported.
In 2008, partners in the investment firm transitioned from Camelot Ventures to a new entity called Camelot Venture Group that kept investments made as part of the previous company.
Smile-makers
SmileDirectClub is expanding, while its losses are growing: It reports a 190 percent increase in revenue from $146 million 2017 to last year's $423.2 million; it saw net losses of $74.8 million last year, rising from $32.8 million in 2017, according to the SEC filing.
The company says it has had more than 700,000 customers. It employs 5,000 total, with more than 100 in Michigan. It operates 300 brick-and-mortar SmileShops, including 11 in Michigan.
And more are coming: SmileDirectClub launched in the U.K. and Australia this year. Plus, CVS Health announced in April it had partnered with SmileDirectClub and plans to open SmileShops in "hundreds" of its pharmacies this year, more than doubling the SmileShop footprint.
How does the smile-straightening work? After customers make impressions of their teeth from their home or at a SmileDirectClub shop, they are mailed a box with a series of custom, clear aligners that shift teeth in five to 10 months.
It's billed as a lower-cost, remote way to get straight teeth. SmileDirectClub says its at-home plan costs up to 60 percent less than traditional methods. It says traditional fixes cost $5,000-$8,000 or more, while it charges $1,895. It also has an $85-per-month option for a total of $2,290.
The company says it works with 225 dentists and orthodontists who build customers' alignment plans based on photos and medical history.
But the traditional orthodontist industry is opposed to customers going through the medical procedure without in-person supervision from a dental professional. The main orthodontists' trade association has filed complaints against SmileDirectClub with 36 state dental boards and attorneys general alleging regulatory and statutory violations, Bloomberg reported in October.
New funding
SmileDirectClub raised $380 million in a funding round last fall that valued the company at $3.2 billion, Bloomberg reported. Private equity investor Clayton, Dubilier & Rice, with main offices in New York and London, led the financing round. It was joined by Kleiner Perkins and Spark Capital. Clayton partner Rick Schnall joined the orthodontics startup's board of directors.
The company said at the time it would use the funding for research and development, and international expansion. Before the fall round, most of its funding came from Camelot, though it has other minority investors.
Daniel Sillman, a Birmingham native and childhood friend of the founders, invested in SmileDirectClub with business partner Green, the Saginaw native and Golden State Warriors and Michigan State University basketball star.
"When I was presented with the opportunity to invest, it was a no-brainer for me, you know, obviously, having someone like David Katzman, who's a genius in building direct-to-consumer business," Green said, adding that he sees a growing international market for the lower-cost teeth straightening option.
Sillman — CEO of Relevent Sports Group, owned by billionaire real estate developer and Detroit native Stephen Ross — called the IPO a "moment of validation."
"There's a lot of institutional investors who have wanted to invest in SmileDirect for a long time, but haven't had access, so a lot of institutional capital wanting to invest in them in market … that'll really put a tailwind behind them in the IPO," he said.
Sillman and Green invested in 2016. Before that, Green said, he used the startup's aligners to fix his bottom row of teeth after he lost his retainers, his teeth moved and he felt self-conscious about how they looked for years.
"I think the best experience, knowledge, you can get from a specific product is to use it yourself," he said. "I'm a happy customer."
Align Technologies, which makes another invisible aligner brand, Invisalign, was supplier for and had a 17 percent stake in SmileDirectClub, according to Camelot. But it sold back its shares over a lawsuit regarding breach of a noncompete clause in its contract, Forbes reported.
